If you look at both risk and reward, high-rate savings accounts might be a better place for your money than any alternative.
Stocks are having a great year, but we saw late last year how quickly things can reverse. Bonds are performing nicely, but they keep doing the opposite of what people expect. Guaranteed investment certificates don’t pay enough to compensate for locking your money in and, at the end of the risk spectrum, bitcoin’s a black box that no one really understands.
Savings accounts rule, but let’s not generalize. Look for high-rate accounts from alternative banks and ignore the weak offerings from the big banks and some credit unions. Here are six reasons why high-rate savings is so attractive right now:
-UNUSUAL FINANCIAL MARKET CONDITIONS THAT REWARD SAVERS
High-rate savings accounts have, for the most part, been an oasis of stability in a world of sinking interest rates. These accounts take their cue mostly from what the Bank of Canada is doing with rates, and right now the central bank is maintaining the status quo. No cuts are imminent, although we could see rates move lower in the United States next week.
Bonds and GIC rates are influenced by the bond market, which is operating with a view that interest rates in Canada should be lower because of economic growth challenges. Net results: Bond yields have plunged in the past year and GIC returns have fallen as well. A top rate on five-year GICs has fallen to between 2.8 per cent and 3.1 per cent from 3.5 per cent last summer, while five-year government of Canada bonds have plunged to around 1.4 per cent from 2.2 per cent 12 months ago.
Savings accounts have been a rock for the most part. Exceptions: Tangerine and Simplii Financial have cut savings account rates to 1.15 per cent from 1.20 per cent.
-TONS OF COMPETITION
Two credit unions have opened national online banks in the past couple of years and we may see more of this. The two new banks are called motusbank and Alterna Bank, and they have savings account rates that are close to the top of the category at 2.25 per cent to 2.3 per cent, respectively. EQ Bank isn’t new any more, but it has consistently paid 2.3 per cent over the past while.
A bunch of Manitoba-based credit unions operate smaller-scale online banks that specialize in savings and offer rates in the same zone. You’ll find these accounts from names such as AcceleRate Financial, Implicity Financial and MAXA Financial. The top gun in savings for the moment is Motive Financial, where the Motive Savvy Savings Account was paying 2.8 per cent as of July 25 (this account offers only two free withdrawals a month and charges $5 a withdrawal after that).
-RETURNS BEAT INFLATION
The inflation rate has ranged from 1.4 per cent to 2.4 per cent this year and in June clocked in at 2 per cent. That’s not far off the 1.6-per-cent average inflation rate of the past three years.
You can see from the returns listed just above that a well-chosen high-rate savings account will keep you a bit ahead of inflation. Well-chosen means not using big-bank savings accounts, which are generally in the 1-per-cent range at best.
-YOUR MONEY IS SAFE
You’ll find that the banks offering the best savings rates are all members of deposit insurance plans – either Canada Deposit Insurance Corp. or provincial credit union plans. CDIC covers eligible deposits to a maximum of $100,000 in principal and interest combined. Manitoba’s credit unions offer unlimited deposit insurance, including accrued interest, but there is no government backing.
Deposit insurance is why the return on savings looks appealing right now. That’s upwards of 2 per cent with no risk that you’ll lose any of your money.
-TOTAL LIQUIDITY IF YOU NEED THE MONEY
High-rate savings accounts are generally fee-free, so you can transfer money in and out whenever you want. Mind the gap between starting a transfer and having the money arrive in a chequing account at another bank. Even in this era of instant money, these transfers can take two to three days.
Many online banks also allow you to pay bills from your savings account. You could access your savings by putting a purchase on your credit card and then paying off the card bill from your high-rate savings account.
-THESE RATES MAY NOT LAST
The Bank of Canada has held its trend-setting overnight rate steady since an increase of 0.25 of a percentage point back in fall 2018. There’s a growing sense that the next move by the central bank, whenever that happens, will be to reduce rates. When that happens, expect savings rates to quickly start falling.
FIVE ONLINE RESOURCES FOR SERIOUS SAVERS
Canada Deposit Insurance Corp (cdic.ca): Find out how much coverage you’ll have for your various accounts, and verify that the bank(s) you deal with are members.
Canada High Interest Rate Savings Accounts (highinterestsavings.ca/charts): Very handy for comparing top rates on savings accounts and GICs.
Cannex (cannex.com): A more comprehensive database on savings and GIC rates in that it includes all players. Find out here how badly the big banks lag on rates for depositors.
Deposit Guarantee Corporation of Manitoba (dgcm.com): If you deal with one of the many Manitoba credit unions that run an online bank with good savings rates, this is where you find out the details of the deposit insurance plan that protects your money.
RateSupermarket.ca (ratesupermarket.ca/bank_accounts/savings): There’s an account selector on this rate comparison website that can help you find the best rate on savings accounts, including those for tax-free savings accounts. Quebeckers, this site will be helpful in showing you which banks operate in your province (some don’t).
PERSONAL FINANCE COLUMNIST
The Globe and Mail, July 26, 2019